New Version of Global Capitalism

The decision to break with free-market ideology and spend government money to control the yen’s value against the dollar was mainly driven by Japan’s relationship with China, not America. Japanese companies including Sony and Toyota that had demanded government action devaluing the yen were not concerned primarily with their competitiveness against America rivals. The motivation was a fear of being undercut by exporters in China, Korea, Singapore and Taiwan — all countries that aggressively manage their exchange rates.


With Chinese economic policy now serving as a model for other Asian countries, Japan was faced with a stark choice: back United States criticisms that China is artificially keeping down the value of its currency, the renminbi, or emulate China’s approach. It is a sign of the times that Japan chose to follow China at the cost of irritating America.


Japan’s action suggests that, in the aftermath of the recent financial crisis, the dominance of free-market thinking in international economic management is over. Washington must understand this, or find itself constantly outmaneuvered in dealings with the rest of the world. Instead of obsessing over China’s currency manipulation as if it were a unique exception in a world of untrammeled market forces, the United States must adapt to an environment where exchange rates and trade imbalances are managed consciously and have become a legitimate subject for debate in international forums like the Group of 20.


Market fundamentalists who feel that government interference with free markets is anathema should be reminded that, by today’s dogmatic standards, Ronald Reagan is one of the great manipulators of all time. He presided over two of the biggest currency interventions in history: the Plaza agreement, which devalued the dollar in 1985, and the Louvre accord of 1987, which brought this devaluation to an end.


The fact is that the rules of global capitalism have changed irrevocably since Lehman Brothers collapsed two years ago — and if the United States refuses to accept this, it will find its global leadership slipping away. The near collapse of the financial system was an “Emperor’s New Clothes” moment of revelation.


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